stagflation

[kerrypeeper]

I keep reading that this is looking likely - "February GDP came in below expectations at 0.1%".

Is it likely & for those who have experienced it before what impact does it have? Is there anything one should be doing to lessen the impact or does stuff like saving not spending make it worse?

@MyCommentWasDeleted who was that with, I've not seen many 10 yr fix deals. Although I did read some new longer fixes where lower then 2 yr deals.

@Chloemol

I think it depends where you lived.

I remember rates as high as 17% but at that time a friend bought a flat for £30k on a salary of £10 and a 5% deposit. I grew up on the south coast, by Brighton so expensive by most standards..

Of course 17% would've been difficult but not nearly as much as it would today. To put it into perspective, £30k back then is about £100k today. No way are you able to buy a two bedroom flat on the south coast for £100k.

So any government would be creating armageddon if they allowed interest rates to rise to those levels again.

We are in the process of fixing for 5 years at 1.2%. We hope to pay the balance off then 🤞

Last year and this year we've bought stuff for the house and had new windows/doors etc as we felt it was now or never with ever increasing prices and lack of skilled work people.

We are going on a short city break in June and I think that'll be our last overseas trip for a good while.

I'm trying to buy more locally and support smaller businesses.

It's pretty bad out there tbh. There's a 1929 feel in the air....

[quote kerrypeeper]@MyCommentWasDeleted who was that with, I've not seen many 10 yr fix deals. Although I did read some new longer fixes where lower then 2 yr deals. [/quote]
Virgin Money but Barclays, Skipton and Lloyds are all offering 10 year fix although rates up slightly since we took ours in January.

I'm far from convinced that this coming bout of stagflation will be ameliorated by higher interest rates.

Controlling inflation with monetary policy assumes that rising prices are caused by too much money chasing goods and services, and that making money more expensive reduces demand, and cools prices. This is not what's happening now.

Current inflation is caused by supply side constraints - labour shortages, sticky supply chains - and high input costs such as energy and materials. Raising interest rates and tightening the money supply isn't going to change that. It's going to increase the cost of capital on the supply side, driving prices higher, and any effect on demand is going to come in discretionary consumer spending which the UK economy depends on. What's really causing the hurt in rising prices - food, fuel, and energy - actually has relatively inelastic demand compared to holidays, clothing, hospitality, leisure, toys, electronics and so on. If it follows the pattern of previous downturns the only growth area is going to be in vices: gambling in particular, but also tobacco and booze.

Saving, not spending, is one approach, but if your pay rise doesn't match price rises then at a personal level you'd actually be better off bringing purchases of non-perishables forward if you've got the cashflow to do so. A £1.20 bottle of cooking oil in your cupboard now - even if you won't need it until October - is better than spending £1.80 on one in September if your pay only goes up by 5% and you only get 0.25% interest at the bank in the meantime.

All those people from the 70’s and 80’s fear a return to what they experienced.

@Otherpeoplesteens that's what i've been reading hence new cheaper longer fixes.

**no government is going to make huge numbers of the voting public homeless by allowing interest rates to hit 15%.

Why not.

"No government" would deliberately allow fuel bills to double.

But they did.

"No government" would deliberately break the rules it forced onto the rest of us.

"No government" would break a manifesto pledge and lie about it.
I could go on.

Thinking "no government would" isn't really a political strategy.

Also - and sorry to be a bore - but this is what people wanted anyway. They'll claim they didn't because people are fickle, but it was an inevitable state of affairs once this "no government" was elected.**

Totally agree it makes me laugh when people say the government won’t let the interest rates go that high
If course they will - it really won’t affect them
But it will affect those that have taken out huge mortgages
Plus banks mortgage lenders didn’t know that electric & gas is pretty much doubling over the next year - all of which is money that could have been a persons safety net for interest rates rising

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@kerrypeeper I lived though the 15% interest time. Luckily I'd bagged a fixed rate 2 year 11% deal (!!!!!) that just about saved us. Even so one persons salary covered only the mortgage so we couldn't have kids. It was scary and tough. Overnight we lost all equity in our house as prices crashed.
We moved towns at the time and the housing market was littered with repossessed homes, some heartbreakingly still with the furniture and toys of the evicted families. Just tragic knowing they were crammed into in a grotty b&b whilst their home stood empty, and would be liable for the inevitable negative equity. This was rife at the time. Tragic.

My tips from that time
-fix your mortgage for as long as you can. It gives protection and certainty. It's a gamble but you may just win.

• overpay mortgage now if you can afford it - even £10 a month. It reduced the debt and gives a cushion against rate rises as they happen (ie you already have the first tenner (or whatever) increase covered in your budget, rather than the 'oh shit where do we find that tenner? ). I suspect it will be more than a tenner though

• pay off debt on credit cards as soon as you can. Interest rate hikes will make debt very, very expensive.

• stop buying things so you can reserve any cash. Don't go to the shops or online. You really don't need it. (Kids shoes and uniform are exceptions). Rope the kids into this mindset too. It's good training. 'How can we make a nice present for your friends birthday?' Rather than default buying it.

• live simply. Invite friends round, someone brings each course so no one is footing the bill.

Batten down. It's already tough and inflation and higher interest rates will sink some.

-fix your mortgage for as long as you can. It gives protection and certainty. It's a gamble but you may just win.

Ironic, if you knew where "mortgage" came from

@LemonTT agree with everything you said. Every bloody painful word of it.

The problem is demand is outstripping supply. That's why costs are climbing, it's like sitting on a coiled spring, the economy is bouncing around all over the place.
It will eventually settle.

@DGRossetti sorry I have post covid brain and don't understand your comment.

Just shows what a difference interest rates make. I am convinced that low interest rates have contributed to crazy house prices, as people snapped up second homes.

Totally agree with this.
When interest rates are higher people simply can't borrow as much. And if everyone can't borrow larger sums then we don't have the big jump year on year in house prices we've had recently.

From the POV of someone who was a child/teen during that time, life was different. My family weren't considered poor and nor were the people around us. So in ordinary life; no yearly holidays, even in this country- if anyone at school went abroad for a holiday it was a source of gossip for the whole of their year before and afterward! One family car bought second hand. New toys at Christmas and birthdays only. No eating out at all and if you got take away it was a huge treat a few times a year. Very occasional days out during school holidays but mostly just playing at home. After school activities existed, but you'd only do one at a time rather than several each week.

It was a perfectly good, happy life, it just didn't include the expensive luxuries that have gradually come to be seen as basic essentials for many.

no government is going to make huge numbers of the voting public homeless by allowing interest rates to hit 15%.

Why not.

A £300k mortgage on 3.5% is £1500/month. On 18% it'd be £4500/month.

£300k is the average house price so would literally kill off anyone who didn't have significant equity.

The same would apply up/down the housing ladder. There'd be riots I'd imagine.

We worked out our mortgage on a 15% interest basis and have been overpaying for the last 5 years. I get scared when I see juniors at work mortgaging themselves to the hilt.

I think there is such a commercialist attitude about the need for new stuff, holidays. People have developed a mind set that this kind of lifestyle is an entitlement. That's why I see civil unrest as almost inevitable, people won't see this as a return to the 1970s, 1930s or 1980s bought about by their own political voting preferences, it will be someone else's fault.

I saw an article about cost of living and climate change and suggestions were (1) buy no more than three items of clothes per year (2) one foreign holiday every 7 years (3) vegan and plant based diet 3 times a week.

Fact is if you said that to the average person they would lose their absolute shit.

Interest rates have been kept artificially low for too long and housing has become ridiculously expensive. On an entirely selfish note I would love to see our savings make some money with interest rates that aren't a pathetic 0.1 percent. I would be happy for housing to get cheaper (and as a result out house be worth less) if it meant it became more affordable to the younger generation.

I get scared when I see juniors at work mortgaging themselves to the hilt.

tbf what choice do they have, particularly as I said if rent is higher.

I doubt very few people would pass the 15% stress test particularly amongst the younger generations.

@Gowithme I agree.

It would be interesting to see a pie chart of household expenditure then versus now.

Takeaways, eating out, multiple gadgets, multiple cars. Non of it existed.

Cutting back on these seems an obvious saving area....but we have built a huge economy based on these, so has a massive knock on effect on the people who work in exactly these areas.

I have no idea what the answer is, but tricky waters are ahead.

Weren't the BOE recently looking at loosening lending multiples restrictions/stress tests. Can't see that happening now.

Takeaways, eating out, multiple gadgets, multiple cars. Non of it existed.

Our economy is far more service based then it was then

It was a perfectly good, happy life, it just didn't include the expensive luxuries that have gradually come to be seen as basic essentials for many.

I can see your point. On the other hand a lot of those foreign holidays, extra school activities, eating out etc are literally people's jobs.

Interesting thread.